Principles of Managerial Finance, 15th Edition

6.1 Interest Rates and Required Returns

1. LG1

As noted earlier in this text, financialinstitutions and markets create the mechanism through which funds flow between savers (suppliers of funds) and borrowers (demanders of funds). All else being equal, savers would like to earn as much interest as possible, and borrowers would like to pay as little as possible. The interest rate prevailing in the market at any given time reflects the equilibrium between savers and borrowers.

Interest Rate Fundamentals

The interest rate or required return represents the cost of money. It is the compensation that a supplier of funds expects and a demander of funds must pay. Usually the term interest rate applies to debt instruments such as bank loans or bonds, ...